Finance Committee on Dec. 5th, 2006

[The Chair, Conservative, Brian Pallister]

A recorded vote on—?

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

On clauses 40, 41, and 42. We can do all three at once or one at a time, but I would like a recorded vote.

[The Chair, Conservative, Brian Pallister]

You would like recorded votes on all of those, then?

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Yes.

(Clauses 40 to 42 inclusive agreed to: yeas 10, nays 1) [See Minutes of Proceedings]

(On clause 43)

[The Chair, Conservative, Brian Pallister]

Did you want a recorded vote on clause 43? No?

Mr. McKay, on clause 43.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I want to ask Mr. Lalonde a few questions with respect to part 2, “Amendments to the Income Tax Act (Dividend Taxation)”.

I read proposed subsection (1.1) and I'm not clear on what it actually means. What is the harm that you're trying to remedy by inserting this particular proposed subsection?

[Gérard Lalonde]

Proposed subsection (1.1)?

[John McKay, Liberal, Scarborough—Guildwood, ON]

It's proposed subsection (1.1), on page 95, under subclause 43(1):

Notwithstanding subsection (1),

—I'm not sure where that is—

if in a taxation year a corporation has paid a stock dividend to a person and it may reasonably be considered that one of the purposes of that payment was to significantly alter the value of the interest of any specified shareholder of the corporation, the fair market value of the stock dividend shall, except to the extent that it is otherwise included in computing that person’s income under any of paragraphs 82(1)(a), (a.1) and (c) to (e), be included in computing the income of that person for the year.

I don't understand what that means.

[Gérard Lalonde]

That's an existing anti-avoidance provision that's being amended to reflect the fact that the dividend inclusion is being changed under the new high-rate dividends.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Well, that may be. I still am not too much further along in my understanding of what that actually means. What is the corporation doing and how is the person who is receiving the benefit from the corporation being taxed here? I'm not clear as to what you're going after.

[Gérard Lalonde]

Sorry, what page are you on?

[John McKay, Liberal, Scarborough—Guildwood, ON]

I'm on page 95, the bottom of page 95 and the top of page 96.

[The Chair, Conservative, Brian Pallister]

This section references the stock dividend. If the purpose of the declaration might be considered that it was to alter the value of the interest of any specified shareholder, the fair market value of the stock dividend would be considered in computing the income of that person.

[Gérard Lalonde]

This is the amendment to subsection 15(1.1) of the Income Tax Act.

[The Chair, Conservative, Brian Pallister]

This is not an amendment. This is just a question about existing clause 43, with no amendment reference. He's just asking a question pertaining to clause 43 and proposed subsection 15(1.1), I believe.

Is that your question, Mr. McKay?

[John McKay, Liberal, Scarborough—Guildwood, ON]

Yes.

[The Chair, Conservative, Brian Pallister]

Your question is why is that particular reference in there?

The reference itself refers to where it may reasonably be considered that one of the purposes was to significantly alter the value of the interest of a specified shareholder, the fair market value of the stock dividend shall, except to the extent that it is otherwise included in computing that person's income, be included. So it would be deemed to be included in income if the purpose was to alter the value of the share.

[Gérard Lalonde]

To alter the value of an interest—

[The Chair, Conservative, Brian Pallister]

Of the interest—

[Gérard Lalonde]

—of any specified shareholder.

That's an anti-avoidance rule that comes into play when stock dividends are paid on certain shares in an attempt to, as indicated here, change the value of shares held by a specified shareholder. This ensures that this rule doesn't come into play if it's otherwise picked up as a dividend under the new dividend rules.

[The Chair, Conservative, Brian Pallister]

It's to limit the discretionary tax avoidance tactics available to corporate structures for structuring dispositions to favour one or another shareholder specific to their tax situation.

[Gérard Lalonde]

That would be a fair enough way of describing it.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Can you give me an example?

[Gérard Lalonde]

No, I can't give you an example offhand, right now.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Am I going on with the wild, wild realm of speculation that a closely held corporation wishes to reward the most significant shareholder in the corporation and just simply give it shares, which to another shareholder would be worth x, but to this particular shareholder would be worth x plus?